How to increase Industrial productivity for Economic Development?

Context: In the wake of this pandemic, industries and businesses worldwide have been hurt. The global economy hasn’t been in a great shape of late and is hampering manufacturing activity back home. India needs to make industrial production efficient and increase labour productivity to compete with global powers if the dream of self-reliant India is to be realized. 

Relevance: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment.

Background

• Inefficiencies of India’s infrastructure, logistics and supply chains, and corrupt practices, put a considerable burden on achieving cost efficiencies for businesses operating in India, leading to low productivity and increased cost of production.
• During the high economic growth phase between 2004 and 2008 (just before the global financial crisis hit), India’s labour productivity grew by over 14% every year.
• But between financial years of 2011 and 2015, this rate fell to just half of that (7.4%) and continued its deceleration to just 3.7% between financial years of 2016 and 2018.
• India's labour regulations are perceived to be rigid, with multiple laws at the national level and in various states. Existing labour laws encourage a low scale of manufacturing, as many laws apply only when businesses have a certain number of workers, thus dragging productivity.
• India will have to raise its labour productivity growth to 6.3% to achieve 8% GDP growth while it has to be up by 7.3% in order to achieve economic growth of 9%. The labour productivity growth in the current financial year has been pegged at 5.2%.

What is productivity and why does it matter?

• Broadly speaking, productivity is a measure of the efficiency with which resources, both human and material, are converted into goods and services. Besides land and capital, labour productivity plays a crucial role in deciding the rate of economic growth.
• Indeed, India Ratings report points out that globally labour productivity growth alone accounted for about two-thirds of the gross domestic product (GDP) growth during FY01-FY10, leaving only one-third to labour/employment growth.
• Labour productivity is crucially dependent on businesses investing in knowledge and innovation even as the governments bring about structural reforms that enable such investments to bear fruit.
• According to Indian Ratings, “a lot needs to be done quickly both on the policy front as well as companies’ level because productivity is the most powerful engine of driving and sustaining manufacturing growth, and making the sector globally competitive”.

• A country that has a higher level of productivity than another one is able to produce more with the same amount of inputs and is thus comparatively more competitive. In contrast, countries with higher productivity growth experience larger relative increases in their output than those with lower productivity growth rates.
• With this being said, however, across sectors industrial/manufacturing productivity tends to grow faster than agricultural productivity due to a variety of factors, including technological change, economies of agglomeration and economies of scale.
• Moreover, as the share of the manufacturing sector in GDP increases, so does aggregate productivity growth, as labour moves from a relatively low productivity sector, such as agriculture, to a higher productivity sector, such as manufacturing.

India has an incomes crisis: Incomes of people in the lower half of the pyramid are too low.

The solutions economists propose are:

1. Free up markets,
2. Improve productivity
3. Apply technology

Free up for markets

• It is suggested that markets should be freed up for agricultural products so that farmers can get higher prices; and freed up for labour to attract investments.
• Without adequate incomes, people cannot be a good market for businesses. In fact, it is the inadequate growth of incomes that has caused a slump in investments.
• Ironically, the purpose of freeing up markets for labour is to reduce the burden of wage costs on investors just when wages and the size of markets must be increased.

Improvement of ‘productivity’ is the key to economic progress

• Productivity is a ratio of input in the denominator and an output in the numerator.
• The larger the output that is produced with a unit of input, the higher the productivity of the system.
• Economists generally use labour productivity as a universal measure of the productivity of an economy.
• Companies can apply two broad strategies for improving their productivity. They can take the managerially more difficult route of increasing the total output of the factory while maintaining the number of workers. This may require adding more machines and technology to supplement the capacity of workers to increase total output. This is a good strategy for capital ­rich enterprises and countries. 
• Alternatively, employers can enhance their workers’ skills and create a culture of continuous improvement in the factory, whereby workers and managers cooperate to improve the capability of their system and squeeze more output from limited capital resources.
• This is the strategy of ‘total quality management’, with which Japanese companies reduced their costs and improved the quality of their products in the 1960s and 1970s, becoming the most competitive enterprises in the world.
• For capital-scarce and human resource-abundant countries, such as many developing countries, the correct ratio of productivity is output per unit of capital.

Apply technology

• Schumacher, best known for his seminal idea ‘small is beautiful’ was an economist ahead of his time. He understood where capitalism powered with technology would be heading. In his essay, ‘Industrialisation through Intermediate Technology’, he wrote: “If we define the level of technology in terms of ‘equipment cost per work­place’, we can call the indigenous technology of a typical developing country (symbolically speaking) a £1­technology, while that of the modern West could be called a £1,000 ­technology.
• The current attempt of the ‘developing ‘countries, supported by foreign aid, to infiltrate the £1,000­ technology into their economies inevitably kills off the £1­technolgy at an alarming rate, destroying traditional workplaces at a much faster rate than modern workplaces can be created and producing the ‘dual economy’ with its attendant evils of mass unemployment and mass migration”.
• Schumacher had warned there was a malaise brewing beneath the drive to ‘Westernise’ and ‘technologise’ economies. The harsh lockdown of the economy in India to prevent the spread of COVID­19 caused the malaise to spill out for everyone to see. 

Labour productivity

• Productivity is measured relative to an input. Thus, labour productivity refers to the amount of output that is produced relative to the amount of labour that is used.
• It has been argued that “improving a country’s ability to raise… its standard of living over time depends almost entirely on its ability to raise its output per worker”. One simple way to measure labour productivity is by calculating the ratio of output (GDP) per employed worker.

Transport Facilities:

• To facilitate the farmers to produce new farm inputs and enable them to sell their product in markets, villages should be linked with mandies.
• It would help to raise their income which in turn stimulates the farmer’s interest to adopt better farm technology with sufficient income. Thus the cultivator can invest more for the improvement of land.

Irrigation Facilities:

• Crop productivity depends not only on the quality of input but also on the irrigation facilities. Therefore, canals, tube wells should be constructed to provide better irrigation facilities for the security of crops. Extensive flood control measures should be adopted to prevent the devastation caused by floods.

Institutional Credit:

• To save the farmers from the clutches of moneylenders, adequate credit facilities should be made available at reasonable cheap rates in rural areas. The land mortgage banks and co-operative credit societies should be strengthened to provide loans to the cultivators. Moreover, an integrated scheme of rural credit must be implemented.

Proper Marketing Facilities:

• Marketing infrastructure should be widened and strengthened to help the farmers to sell their products at better prices. There should be proper arrangements for unloading of the produce in the markets. Besides, price support policy must be adopted and minimum prices should be guaranteed to the peasants.

Supply of Quality Inputs:

• The farmer in the country should be supplied with quality inputs at proper times and at controlled prices. To protect the farmers' exploitation, effective steps are needed to be taken to check the sale of adulterated fertilizers.

Consolidation of Holdings:

• In various states consolidation of holdings is not satisfactory. Therefore, efforts should be made towards completing the consolidation work in a specific period of time. Big areas of land which are lying waste, can be reclaimed and made fit for cultivation.

Agricultural Education:

• In a bid to guide and advise the farmers regarding the adoption of new technology arrangements should be made for agricultural education and extension services. It would assist the farmers to take proper crop-care leading to an increase in crop productivity.

Reduction of Population on Land:

• As we know, that in our country, the majority of the population depends on agriculture to earn their both ends meet. This increases the pressure of population on land which leads to subdivision and fragmentation of landholdings. 
• Therefore, proper climate should be generated to encourage the farm people to start employment in subsidiary occupations. It will help to reduce the population pressure on land.
• Surplus labour should be withdrawn from the agriculture sector and be absorbed in the non-agricultural sector.

Provision of Better Manure Seeds:

• The farmers should be made familiar with the advantage of chemical fertilizer through exhibitions and these inputs should be made easily available through co-operative societies and panchayats. Liberal supplies of insecticides and pesticides should be distributed at cheap rates all over the countryside.

Land Reforms:

• It is also suggested that efforts should be made to plug the loopholes in the existing land legislation so that the surplus land may be distributed among the small and marginal farmers. The administrative set-up should be streamlined and corrupt elements should also be punished. It will help to implement the law properly.

Co-operative Farming:

• To check the sub-division and fragmentation of holding, the movement of co-operative farming should be launched. Co-operative farming would result in the adoption of modern technology on so-called big farms. In this way, agriculture will become a profitable occupation through economies of large-scale farming.

Development of Cottage and Small Scale Industries:

• In rural areas, more emphasis should be made to set up cottage and small scale industries. This will raise the income of the peasants and keep them busy during the offseason.

Raising productivity

• To become globally competitive, India’s manufacturing value chains must lift their productivity—in GVA output per full-time-equivalent worker—closer to global standards.
• They have a long way to go in this regard: their labour productivity and capital productivity are both low.
• Compared with India, manufacturing productivity in Indonesia is twice as high; in China and South Korea, productivity is four times higher. (Especially wide disparities can be seen in certain sectors. For example, South Korea’s electronics manufacturing sector is 18 times more productive than India’s, and its chemicals manufacturing sector is an astonishing 30 times more productive.)
• While other developing economies such as China have managed to catch up with advanced economies in capital productivity, India’s capital is only about two-thirds as productive as China’s.

What can be done?

• Policy reforms that help create better infrastructure and logistics could also help Indian manufacturing become more productive.
• Many of the country’s manufacturers particularly need ecosystems of nearby suppliers. For example, companies that make high-tech goods such as computers, electronic and electrical equipment, and telecommunications equipment must have reliable access to components.
• By providing incentives to suppliers that operate within port-proximate export-processing (or coastal economic) zones, policymakers can make a tremendous difference in favour of Indian manufacturers.
• Other opportunities for Indian manufacturers to boost their productivity include offering more value-added goods, with higher product quality, better packaging, and stronger brands.
• Such enhancements would allow them to command higher prices, leading to one and a half to three times higher GVA (for example, in food processing, capital goods, steel, and steel products).

How it can be done?

Securing know-how and technology:

• While India’s established manufacturing value chains possess the technology and know-how they need to compete with overseas peers, the less-developed value chains do not. To be sure, manufacturers themselves must source technology through acquisitions and alliances. The government can also help.

One approach:

• Create a stable framework of time-bound and conditional localization incentives to entice global companies to set up operations in India, either independently or with a local partner. For example, leaders in India’s automotive industry generally believe that high import tariffs on finished vehicles allowed the industry to develop local product-development, supplier, and manufacturing capabilities.
• Such an approach would greatly help value chains. The government has already raised the limit of foreign direct investment (FDI) to 74 % to alleviate the concerns of global defence companies about the transfer of technology.
• The Indian government might capitalize on this by providing localization incentives.
• Additional support for high-technology and low-carbon value chains might come from viability-gap funding (VGF), in which the government provides some capital to make projects financially viable.
• For example, India imports nearly all of the LCD panels that go into electronic devices made in the country.
  • The country lacks the technology to set up an LCD-panel factory, and the investment case for such a plant does not hold up in the current tariff regime.
  • Combined with time-bound tariffs or incentives, VGF could help improve the returns from investments in such a factory to 10 to 12 % of the invested capital.

Accessing capital

• The availability of capital will be the single-biggest obstacle to increasing India’s manufacturing GDP. With an incremental capital-to-output ratio between 4.5 to 6.0 (which could become more favourable with productivity gains), India’s manufacturing sector would need investments totalling $1.0 trillion to $1.5 trillion over the next seven years to double its GDP in the same timeframe, provided that India also raises its GVA capture in these value chains by 25 %.
• Financial reforms would help stable, cash-generating manufacturers attract low-cost domestic capital from long-term savings pools, such as pension funds and insurance.
• However, these savings pools alone cannot supply as much capital as Indian manufacturing companies will need. They will also have to tap other sources. Many of the larger domestic manufacturing companies generate adequate returns and so are likely to attract investors.
• If India’s recent FDI growth continues and manufacturing doubles its share of FDI, then FDI could provide 25 to 30 % of the capital that Indian manufacturers will need over the next seven years. Patient long-term investors, such as those in Japan, are strong candidates.
• India receives only 1.5 to 2.0 % of its annual FDI from Japan but could collect several times more than this if it made an aggressive push.
• India has an opportunity to raise its manufacturing competitiveness and become a supplier of choice not only for its large consuming class but also for global markets. The specialization approach that focuses on eliminating roadblocks in the chosen value chains holds great promise for bringing together manufacturers and, with government support, raising productivity, securing superior know-how, and generating higher returns on capital.

• The economist Dani Rodrik, an authority on industrial policy and international trade, advocates reforms that will induce firms to employ more numbers of less-skilled workers. He says, to increase the productivity of firms, “too often governments subsidise labour replacing, capital­intensive technologies, rather than pushing innovation in socially more beneficial directions to augment rather than replace less-skilled workers.” 
• A turbo­charged, financial globalisation has made life very easy for migrant capital while making the lives of migrant workers more precarious. The power to fix the rules of the game has become concentrated with wealthy investors and large multinational corporations. The rules do not favour workers and tiny enterprises because they have too little power.
• Large enterprises employ fewer people within their own organisations; therefore, labour unions have lost their traditional support bases.
• The power balance must shift. Small enterprises and workers must combine into larger associations, in new forms, using technology, to tilt reforms towards their needs and their rights. 
• The World Economic Forum suggests India must improve its product market efficiency, which is undermined by a lack of trade openness.
• Further, it said that India’s labour market is characterized by a lack of worker rights’ protections, insufficiently-developed active labour market policies and critically-low participation of women.
• An obvious solution to India’s productivity woes will be to implement these changes. To be sure, the government is doing its bit to ease labour regulations.